WASHINGTON, D.C. - (Mealey's) The U.S. Supreme Court on April 16 ruled that a health plan administrator's claim for reimbursement against a plan participant under Employee Retirement Income Security Act Section 502(a)(3) based on an equitable lien by agreement is governed by the terms of the plan and is not subject to equitable limitations (U.S. Airways, Inc. v. James McCutchen, et al., No. 11-1285, U.S. Sup.) (lexis.com subscribers may access Supreme Court briefs and the opinion for this case).
The Supreme Court vacated the Third Circuit U.S. Court of Appeals' ruling that an action brought under Section 502(a)(3), which authorizes a plan administrator "to obtain . . . appropriate equitable relief . . . to enforce . . . the terms of the plan," is subject to equitable defenses alleging unjust enrichment.
The equitable rule limiting double recovery and the common-fund doctrine cannot "override the clear terms of a plan," Justice Elena Kagan wrote for the majority. However, the majority found that the common-fund doctrine could be used to determine the parties' intent. Because the plan's reimbursement provision did not address how to allocate a third-party recovery, "it is properly read to retain the common-fund doctrine," the majority said in remanding.
Justices Anthony M. Kennedy, Ruth Bader Ginsburg, Stephen G. Breyer and Sonia Sotomayor joined in the majority opinion.
Justice Antonin Scalia filed a dissenting opinion, in which Chief Justice John G. Roberts Jr. and Justices Clarence Thomas and Samuel Anthony Alito, Jr. joined. The dissent agreed that "equity cannot override the plain terms of the contract" but would have reversed the Third Circuit, saying that "we granted certiorari on a question that presumed the contract's terms were unambiguous."
James McCutchen suffered serious injuries in an automobile accident. The U.S. Airways, Inc. Employee Benefits Plan paid $66,866 in medical expenses on McCutcheon's behalf.
McCutchen recovered $110,000 from third parties. After paying a 40 percent contingency attorney fee and expenses, McCutchen's net recovery was less than $66,000. US Airways, which had not sought to enforce its subrogation rights, demanded reimbursement for the entire amount it paid for McCutchen's medical bills. McCutchen's attorney placed $41,500 in a trust account, representing USAirways' full claim minus a proportionate share of the attorney fees.
The benefits plan contained a subrogation and right of reimbursement clause that required a beneficiary to reimburse the plan "out of any monies recovered from a third party."
US Airways sued McCutchen and his attorney under Section 502(a)(3), seeking "appropriate equitable relief" in the form of a constructive trust or an equitable lien on the $41,500 held in trust and the remaining $25,366 personally from McCutchen. The U.S. District Court for the Western District of Pennsylvania granted summary judgment to US Airways.
The Third Circuit vacated, concluding that under "the traditional equitable principle of unjust enrichment," the District Court's judgment requiring McCutchen to provide full reimbursement to US Airways without allowance for McCutchen's legal costs "constitutes inappropriate and inequitable relief." Moreover, "[b]ecause the amount of the judgment exceeds the net amount of McCutchen's third-party recovery, it leaves him with less than full payment for his emergency medical bills, thus undermining the entire purpose of the Plan. At the same time, it amounts to a windfall for U.S. Airways, which did not exercise its subrogation rights or contribute to the cost of obtaining the third-party recovery. Equity abhors a windfall," the Third Circuit said.
Lien By Agreement
The majority noted that in Sereboff v. Mid Atlantic Medical Servs., Inc., 547 U.S. 356 (2006) [an enhanced version of this opinion is available to lexis.com subscribers], the court left open whether contract-based relief, although "equitable," was not "appropriate" under Section 502(a)(3) because "it contravened principles like the make-whole doctrine."
However, "Sereboff 's logic dooms McCutchen's [argument]. US Airways, like Mid Atlantic, is seeking to enforce the modern-day equivalent of an 'equitable lien by agreement.' And that kind of lien - as its name announces- both arises from and serves to carry out a contract's provisions. . . . So enforcing the lien means holding the parties to their mutual promises. . . . Conversely, it means declining to apply rules - even if they would be 'equitable' in a contract's absence - at odds with the parties' expressed commitments. McCutchen therefore cannot rely on theories of unjust enrichment to defeat US Airways' appeal to the plan's clear terms," the majority said.
The majority said that it found no cases in which an equity court applied the double-recovery or common-fund rule to override a contract's terms.
The majority noted that the United States, which appeared as amicus curiae in support of neither party, argued that, at equity, an equitable lien by agreement was enforceable according to its terms but that an equity court has "inherent authority" to apportion litigation costs in accord with the "longstanding equitable common-fund doctrine," even if it conflicted with the parties' contract.
"[P]rinciples of unjust enrichment give way when a court enforces an equitable lien by agreement. . . . The agreement itself becomes the measure of the parties' equities; so if a contract abrogates the common-fund doctrine, the insurer is not unjustly enriched by claiming the benefit of its bargain," the majority said in rejecting the government's argument.
The majority said that its holding "reflects ERISA's principal function: to 'protect contractually defined benefits.'"
The majority commented that although equitable rules "cannot trump a reimbursement provision, they still might aid in properly construing it."
"The plan is silent on the allocation of attorney's fees, and in those circumstances, the common-fund doctrine provides the appropriate default. In other words, if US Airways wished to depart from the well-established common-fund rule, it had to draft its contract to say so-and here it did not," the majority said.
However, "[t]he reimbursement provision at issue here precludes looking to the double-recovery rule in this manner. Both the contract term and the equitable principle address the same problem: how to apportion, as between an insurer and a beneficiary, a third party's payment to recompense an injury. But the allocation formulas they prescribe differ markedly," the majority said.
In dissenting, Justice Scalia said that the participant and the United States conceded that the plan required a beneficiary to reimburse the plan out of third-party recoveries for amounts the plan paid, without contribution to attorney fees and expenses.
The Court thus has no business deploying against petitioner an argument that was neither preserved, . . . nor fairly included within the question presented," the dissent said.
US Airways is represented by Neal Kumar Katyal, Catherine E. Stetson, Dominic F. Perella, Mary Helen Wimberly and Sean Marotta of Hogan Lovells in Washington, Noah G. Lipschultz of Littler Mendelson in Minneapolis and Susan Katz Hoffman of Littler Mendelson in Philadelphia.
McCutchen is represented by Matthew W.H. Wessler and Leah M. Nicholls of Public Justice in Washington; Leslie A. Brueckner and Arthur H. Bryant of Public Justice in Oakland, Calif.; Jon R. Perry and Paul A. Hilko of Rosen, Louik & Perry in Pittsburgh; and Peter K. Stris and Brendan S. Maher of Stris & Maher in Dallas.
For all of your legal news needs, please visit www.lexisnexis.com/mealeys.
Lexis.com subscribers may search all Mealey Publications.
Non-subscribers may search for Mealey Publications stories and documents at www.mealeysonline.com or visit www.Mealeys.com.
Mealey's is now available in eBook format!
For more information about LexisNexis products and solutions, connect with us through our corporate site.